Yahoo Finance Why stock market volatility has disappeared
In the early days of the Trump administration, news headlines would suggest a chaotic, uncertain world for investors to navigate.
But in recent weeks, something else has instead happened in the stock market: volatility has disappeared and stocks have moved back to new records.
As measured by the decline in the CBOE’s Volatility Index, also known as the VIX and commonly referred to as the “fear index,” concerns among investors have been on the decline.
In a post on Tuesday, economist Tyler Cowen noted that despite an unsettled political environment, stocks remain near highs and, while markets are not great at forecasting future turbulence, “right now it is worried less than many of you are.”
Cowen added that, “I do understand that America is consuming some of its political and reputational capital. Yet so far the best prediction is that the relatively manageable scenarios are coming to pass.”
Some strategists, however, have been quick to note that just because the VIX is low, “fear” among market participants isn’t explicitly lacking.
Additionally, as Bloomberg reported last week, a decline in correlation among stocks in the S&P 500 has pushed down implied volatility for the index. Mentions of the word “uncertainty” in news stories is also at a record, according to Bloomberg’s Tracy Alloway and Isobel Finkel.
Clearly, then, there are both technical reasons for a surface-level view of volatility appearing low in addition to this “surface-level view” also not really capturing volatility at all.
But the collective behavior of stock markets both now and after the election makes clear that the stock market, or, more specifically, the investor class, is willing to give Donald Trump the benefit of the doubt.
Which should not, perhaps, come as a surprise.
As Yahoo Finance’s Rick Newman has chronicled, the shareholder class has been the first and perhaps only explicit beneficiary of the Trump era so far. After Trump’s election, markets rallied on hopes that lower corporate taxes, broad deregulation, and infrastructure spending would jumpstart the economy and be handed down from the Republican-controlled legislative and executive branches in short order.
And in financial markets, expectations matter just as much as action if not more. There’s a reason why “Buy the rumor, sell the news” is a long-running truism.
I also think we forget that the investor class, if we define it as anyone who owns stocks, captures only 52% of US adults. And to go even further, people who actually work in the investment business skew older, whiter, and more male than the rest of the population. In this respect, they look a lot like Trump voters.
Markets commentary is often driven by the idea that markets contain some sort of collective wisdom we can unlock about society and human behavior if only we look close enough. Markets, then, aren’t so much efficient because of math but because the collective wisdom of crowds finds its own equilibrium in time. This is sort of like what Derek Thompson, in his new book “Hit Makers,” says is what Hollywood script analyst Vincent Bruzzese calls the “physics of society.”
Under this framework, then, there is a Big Thing we’re all missing about the Trump era, and it is found in the VIX. And I think Cowen’s contention that markets are calling for more manageable scenarios coming up in the Trump era — instead of a global war, for instance — is probably right.
Markets are expecting more positive developments in Washington. Or, at least, developments that won’t derail the economic progress we’ve made since the financial crisis. But markets are also representing expectations held by a subset of the population that looks not unlike the average Trump voter. By extension, these people would be expected to view the administration more favorably.
The stock market does not speak for all of us.
Stock market history shows us that on balance, Democratic presidents tend to be better for stocks than Republican presidents. But if the Wall Street investor class we think of as “the market” is itself more representative of a Trump voter, why wouldn’t this be a place to reflect the most positive view of his policies?
And what’s more, if financial markets are places for, of, and by business-minded people, why would a president who campaigned on his business success and acumen not be greeted by a sympathetic audience?
Investors are still, after all, only human.
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Myles Udland is a writer at Yahoo Finance. Follow him on Twitter @MylesUdland
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